William Gale's Argument Against the FairTax
Below is William Gale’s argument against the FairTax, which appeared in the June 2005 issue of Costco Connection. I will post the “for” argument by Rep. Linder tomorrow, if I get a chance [update: view here].
For more background on this Costco poll, see my earlier post “56% of Costco Members Favor Retail Sales Tax.”
I am inserting numbers in brackets before each of his assertions and/or arguments, so that anyone who wishes may rebut his specific points in the comments.
From the byline: “William Gale is the Arjay and Frances Fearing Miller Chair in Federal Economic Policy at the Brookings Institution and co-director of the Tax Policy Center.”
The notion that a national retail sales tax could effectively replace the entire federal tax system is a pleasant diversion. But careful research has shown that it is a dangerous and ludicrous fantasy.
The 23 percent rate that Rep. John Linder says would be needed is really a 30 percent markup at the cash register. To be clear, under his proposal, if a good costs $100 before the sales tax is imposed, it would cost $130 (not $123) including the sales tax. Most people would call this a 30 percent sales tax.
Academic research shows that the calculations that lead Rep. Linder to this 30 percent rate contain a big mathematical mistake. As a result, using his tax rate would raise the federal deficit by $6 trillion over the next 10 years! Avoiding this would require a 42 percent sales tax or markup.
Rep Linder’s tax rate also assumes there would be no tax avoidance or evasion, even though most serious analysts think the underground economy would thrive under the sales tax. Allowing for just half as much evasion as exists under the income tax would raise the required sales tax rate to above 50 percent.
It seems doubtful that people would tolerate a tax at that rate on necessities such as food, health, house purchases and mortgage payments. (Yes, Rep. Linder’s tax would tax a good chunk of mortgage interest.) The number of people without health insurance, for example, would likely rise by more than 10 million. But if we exempt any of these items, the required rate would have to rise.
The required rate would be even higher if Rep. Linder’s tax were not allowed to impose massive burdens on state and local governments. “Paying” for the federal government by taxing state governments does not reduce tax burdens, it just shifts them. So expect state and local taxes to rise.
Countries that have tried to enforce retail sales taxes at rates above 10 percent have uniformly given up because of evasion. Likewise, no state sales tax has rates that high. If we did impose a 50 percent or higher sales tax, it would be evaded massively.
The tax system’s many problems require serious thinking and creative solutions. But a national retail sales tax is not the answer.
So there it is. Have at it, folks. (Remember to be polite and factual.)
I know answers to some of these objections, but not all of them. (E.g., I’m not up on the history of sales taxes in other countries.) I look forward to reading the comments on this post.